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U.S. Lubes, L.L.C. v. Consolidated Motor Oils

January 16, 2008


On appeal from the Superior Court of New Jersey, Chancery Division, Middlesex County, Docket No. C-268-04.

Per curiam.


Submitted December 5, 2007

Before Judges Cuff, Lisa and Simonelli.

Plaintiff, U.S. Lubes, L.L.C., initiated this action against defendants, Consolidated Motor Oils, Inc., Paul Shapiro and Inka Shapiro, seeking injunctive relief and damages arising out of an alleged breach by defendants of provisions in agreements by which defendants sold their business to plaintiff. Defendants counterclaimed, alleging they were entitled to damages caused by plaintiff's breach of the agreements. Following a three-day bench trial, Judge Chambers issued a written decision on June 14, 2006 and entered a corresponding final judgment on August 17, 2006.

She found that defendants violated the non-competition provisions in the agreements, thus justifying plaintiff's termination of the agreement that provided for an ongoing relationship between the parties, under which defendants would have been entitled to additional remuneration. However, the judge found that plaintiff failed to prove damages caused by defendants' breach, and therefore did not award any damages to plaintiff.

With respect to defendant's counterclaim, the judge found that plaintiff breached a provision in the agreements requiring the payment of commissions (which was undisputed), and awarded judgment to defendants on that claim in the amount of $24,390. The judge further found that plaintiff breached the covenant of good faith and fair dealing, and awarded defendants $42,575.70 on that claim. The judge rejected the remaining aspect of defendants' counterclaim, which sought damages for additional remuneration under the agreement providing for an ongoing relationship. This relief was denied based upon the finding that, because of defendants' breach of the non-competition provisions, plaintiff was justified in terminating the agreements.*fn1

Plaintiff appeals. It argues that the judge erred in determining that it suffered no damages as a result of defendants' breach of the non-competition provisions. More particularly, it argues that the judge erred in finding that plaintiff abandoned the customers to whom defendants sold product in violation of the non-competition provisions. Plaintiff further argues that the judge erred by awarding damages to defendants based upon a breach of the covenant of good faith and fair dealing because (1) plaintiff's pricing decisions were legitimate business determinations, not made in bad faith, and therefore did not constitute a breach of the covenant, and (2) defendants should have been barred from recovery under the doctrine of unclean hands. We reject plaintiff's arguments and affirm.

Defendant, Consolidated Motor Oils, Inc., was a wholesale distributor of petroleum-based products, operated since 1975 by defendants, Paul Shapiro (the sole shareholder) and Inka Shapiro, his wife. Plaintiff is the nation's largest distributor of Citgo products. Ninety percent of plaintiff's sales are Citgo products. Robert K. Smith, president of plaintiff, entered the petroleum business in the 1980s. He was familiar with defendants and their business. From time to time, he and Paul Shapiro had conversations about Shapiro selling his business. In 2001, at age sixty-three, Shapiro believed the time was ripe, and the discussions became more serious.

On October 17, 2001, with both sides represented by counsel, the parties entered into an Asset Purchase Agreement and a Services Agreement. The principal asset defendants were conveying was their customer list. They also conveyed their rights under certain contracts with customers and certain equipment.

In return, plaintiff agreed to make an initial payment of $50,000 for the assets, which was paid and is not in dispute. Plaintiff also agreed to pay an additional $50,000 one year later, provided, that, if the number of gallons of Products which the Purchaser shall sell to persons or entities named on the Customer List (the "Customers") during the period commencing on the Closing Date and ending on October 16, 2002 (the "Actual Sales"), shall be less than 145,000, the amount to be paid to the Seller on November 15, 2002 shall be reduced by an amount equal to (i) the difference of 145,000 minus the number of gallons of Products of Actual Sales, multiplied by (ii) $0.65.

The Asset Purchase Agreement contained a non-competition clause, prohibiting defendants from soliciting customers to buy products from anyone other than plaintiff for five years. However, the Asset Purchase Agreement contained another provision that authorized defendants to sell existing inventory in the ordinary course of business for six months, followed by a ninety-day period during which they could sell remaining inventory "in bulk or otherwise." This provision was in recognition of the fact that plaintiff did not purchase defendants' inventory, but the contractual provision gave plaintiff the right to purchase from that inventory. The provision also obligated defendants to sell the inventory, with notice to plaintiff, to customers on the customer list.

The Services Agreement established an ongoing relationship, in which defendants would be independent contractors obligated to assist plaintiff in developing the customers on the customer list and to use their best efforts to convert the customers to plaintiff's product lines, including, of course, its major line of Citgo products. This agreement was also for a five-year term. It contained a non-competition clause similar to that in the Asset Purchase Agreement, except that the duration of that provision would extend two years beyond the Services Agreement's termination date.

Under the Services Agreement, defendants would be paid commissions based upon gross sales they procured for plaintiff, at the rate of 5% for non-bid sales (to private sector purchasers) and 3% on bid sales (to governmental entities). Defendants would also receive expense money, including a $125 per week automobile allowance and health insurance coverage. They would receive a $3000 per month draw against ...

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